Obtaining Strategic Advantage from Being Imitated: When Can Encouraging “Clones” Pay?

Abstract

An important business strategy research theme concerns finding ways to minimize competition faced by the firm. This paper, however, focuses on a different set of situations: the model developed suggests that an innovator's best strategy may be to encourage “clones” of its product when a network externality is present. Key factors to consider in assessing whether encouraging cloning is the innovator's best strategy are: (1) the benefit to be derived in terms of added user base “contributed” by the clone sales, traded-off against (2) the unit sales that will be lost to the clone(s). These factors in turn depend upon the strength of the network effect and the degree to which the innovator's product quality is perceived by consumers to be superior to the clone's. The model further suggests that both the innovator and clone earn their highest payoffs when the clone takes the lead in price-setting, i.e., when the clone establishes its own price by considering, for each price it might set, how the innovator will react to that price, and the innovator, as price-follower, responds to the price the clone chooses. The paper demonstrates that the clone-leader/innovator-follower situation represents the unique Nash equilibrium in price-setting strategies. A central implication is that when operating in a network externality environment, instead of a problem to be avoided, clones may be valuable assets to an innovating firm, building up the user base for the innovator's technology by bringing lower-valuing consumers into the market, which in turn makes the innovator's product more attractive to high- and medium-valuing purchasers. Thus when the above-described conditions hold, being cloned can be more profitable for an innovating firm than dominating the market alone.

Firm’s Strategic Responses in Standardization

“…These literatures used the "tragedy of the anti-commons" concept introduced in [1] to explain question 1. Many economic analyses have been done to answer questions 2, 3, 4 and 5 such as the pioneering study by [4], and then [5], [6], [7], [8], [9], [10], [11], and [12]. One of the findings in this paper is that by only "the tragedy of the anti-commons" concept, one cannot explain why cross-licensing occurs.…”

Should We Wait? Network Externalities, Compatibility, and Electronic Billing Adoption

“…In the information systems (IS) area, a number of theoretical models that involve network externalities have been developed by several authors (e.g., Chismar and Meier [3]; Clemons and Klendorfer [5]; Conner [6]; Nault and Dexter [20]; Riggins, Kriebel and Mukhopadhyay [21]; Wang and Seidmann [25]). These models build on the theoretical networks literature in economics, and are used to analyze IS products or services that exhibit network characteristics.…”

“…Further, a biller may wait for a new and better, but compatible technology, depending on what benefits the biller would expect by adopting the existing technology and how much cost it anticipates to upgrade its technology later. 6 The concepts of network externalities and their effects on technology adoption have been discussed by a number of authors (e.g., Choi and Thum [4]; Economides [7]; Hoppe [10]; Farrell and Saloner [8]; Katz and Shapiro [11,12]). In this paper, we extend the model by Choi and Thum [4] by introducing a stand-alone benefit-discounting factor to take into account the higher costs of early adoption, and by taking out the assumption that the next technology is superior to the current one.…”

Licensing radical product innovations to speed up the diffusion

“…A number of studies have focused on studying optimal licensing contracts, providing conditions under which both parties find the license agreement convenient. Some work explicitly considers that licensing can increase the demand of new product through positive network externalities (Conner 1995) and improvements by quality competition (Shepard 1987). The theoretical industrial organization literature is mainly focused on static models (for a review see, e.g., Shapiro 1985 andKamien 1992).…”